Almost all consumables that consumers purchase can fluctuate in price on a regular basis. The periodicity of these fluctuations depends heavily on a variety of factors, including supply and demand, or variables associated with the supply and demand. Certain consumables are more volatile than others, however. These commodities are usually in relatively heavy demand or are widely consumed such that any disruption in the supply of the consumable may cause a commensurate market spike in the prices of these goods. Products of this type include fuel products such as gasoline or diesel, heating oil, natural gas, crude oil, etc. Disruptions in the supply of these consumables (or commodities from which these products are produced) such as those caused by worlds events, natural disasters, etc. may cause the price of these consumables to jump markedly in a relatively short amount of time. These price spikes are quite noticeable, as these types of products are extensively consumed and fluctuations in the price of these products may occur relatively rapidly.
Examples of these types of effects are prevalent in the current ecosystem employed in the purchasing and distribution of heating oil and propane for individual and business consumers. In most cases, a consumer who utilizes heating oil (or propane) has a storage tank located on site. For example, a homeowner whose boiler or furnace utilizes heating oil may have an above-ground storage tank (AST) or an underground storage tank (UST) located in the basement, the garage, outside adjacent to the building or another location. Such tanks may have a capacity of around 275 gallons or more.
These consumers may have a contract with a retailer to supply them with heating oil on a periodic basis as determined by the retailer. The heating oil retailer may therefore determine when heating oil should be supplied to a particular consumer. This may be based on a consumer's request for delivery, via phone call or fax. Alternatively, this determination may involve the use of various factors or estimations, including such information as weather events, house size, K factor, consumption history, etc. One particular factor that may be accounted for is the desire that the consumer not exhaust the supply of heating oil in the consumer's tank. Software for making such determinations may include, for example, BlueCow (e.g., the Ignite suite of software products) Cargas, or Info-sys.
Thus, for a particular day a heating oil retailer may have a set of consumers to which delivery of heating oil is to be made. The retailer may have a fleet of tank trucks to make deliveries. The driver of each truck is given a set of consumers and a route for delivery to these consumers. The route may be optimized based on a variety of factors, including the location of the consumers, the layout of streets in the area, etc. Software such as UPS Logistics or Appian Logistics may be used for such scheduling.
Thus supplied with a set of consumers and a route, a driver for a heating oil retailer may first go to a heating oil supplier (e.g., wholesaler, jobber, refiner, etc.), such as Amerada Hess, to fill his truck. The price paid by the retailer to the supplier for the heating oil may be the price set by the supplier. For example, the price for a certain day may be set at 12:00 a.m. of that day and is sometimes referred to as the “rack price”. In most cases the supplier may send an invoice to the retailer and the retailer must pay the supplier on approximately a net 10 days basis.
It should also be noted here, that in some cases a heating oil supplier may have their own (on-site or off-site) storage for heating oil. In this case, a heating oil supplier may deliver a quantity of heating oil to the retailer for storage by the retailer. The retailer's fleet of trucks can then be filled from the retailer's store of heating oil. In this case, the supplier may send an invoice to the retailer at the time of the supplier's delivery to the retailer using the price set by the supplier at midnight on the day of the delivery. Again, the retailer must usually pay the supplier on a net 10 day basis.
In any event, once the retailer's truck has been filled, the driver may make deliver to each of the set of consumers on his list according to the route provided. When a driver delivers to a particular consumer the driver may attach a hose from the truck to the consumer's tank and fill the tank with either a predetermined amount or until a signal (e.g., a tank whistle) is received that the tank is full. A typical delivery of heating oil to a consumer may be around 140-190 gallons. The volume of heating oil provided to the consumer may be metered during the delivery process. For example, in many states it is required that the delivery truck have a meter installed, where the meter is calibrated or otherwise regulated by a government agency. Thus, the amount of heating oil put into a consumer's tank during a delivery may be accurately metered.
After the heating oil is delivered to a particular consumer, the consumer may be given a delivery ticket (physically or electronically) or other indication of the amount delivered, the amount to pay based on the amount delivered and the retail price of the heating oil on the day of the delivery and a notice to please pay the retailer according to the contract between the retailer and the consumer. Such contracts usually specify a net 30 day basis for payment, however, on average, consumers end up paying retailers anywhere between 30 and 45 days after a heating oil delivery occurs. A copy of the delivery ticket or the information associated with the delivery ticket (e.g., amount delivered, retail price, total price, delivery date, delivery time, truck number, consumer number, name or address, etc.) may be reported back to the retailer where such information may be stored.
After the deliveries for the day are complete, then, a retailer may owe the supplier for the amount of heating oil loaded onto the retailer's truck by the supplier at the rack price. The retailer may be on a net 10 day payment basis with respect to the retailer's obligation to the supplier. Similarly, each of the consumers to whom the retailer made deliveries may owe the retailer for the amount delivered to that consumer at the retail price on the day of delivery. While the consumer may be on, for example, a net 30 day payment basis according to some contracts between a retailer and a consumer, in most cases a consumer may pay between 30 and 45 days after delivery.
As may be noticed, the time frame in which a retailer may be obligated to pay the supplier (e.g., 10 days) can be shorter than the time frame in which a retailer may receive payment from the consumer for deliveries. This time spread may put the retailers in a difficult position with respect to payments owed versus payments received. A retailer may thus make certain financial arrangements to pay the supplier or to take care of other financial obligations. For example, once heating oil has been delivered to a consumer and the delivery ticket associated with that delivery entered into an accounting system of the retailer, they may be posted as receivables by the retailer. These receivables can be borrowed against by the retailer (e.g., from a bank or other lending or financial institution) where the funds from such a loan may be utilized to pay the supplier or for other financial obligations of the retailer.
There are a number of problems with the current heating oil ecosystem. As the cost of making deliveries by a retailer is currently high, and will seemingly increase in the future because of costs such as fuel delivery truck equipment, delivery labor, delivery motor fuels, insurance and related administrative expenses; frequent deliveries of heating oil to a consumer are uneconomical.
Accordingly, retailers may only deliver to consumers according to a schedule that will prevent the consumer from exhausting his supply of heating oil. This scheduling means that a typical consumer may receive around 6 deliveries a year, with each delivery being on the order of about 130-190 gallons. In most cases, the consumer is required to pay for the entire quantity delivered shortly thereafter, regardless of the fact that the consumer's inventory of heating oil may be consumed over a long period of time. For example, a consumer may be required to pay for the entire quantity of a heating oil delivery that occurred at the end of the spring, even though the vast majority of the heating oil delivered may not be consumed until the next fall or winter. As heating oil costs have increased dramatically (e.g., up to 100%-200%) in recent years, the up-front costs of these heating oil deliveries has soared, challenging both commercial and residential household budgets.
Furthermore, dramatically increasing day-to-day fuel price volatility has made the timing of delivery (resupply) decisions by the retailer critical. This situation exists both because these decisions are out of the control of the consumer and additionally because the consumer is charged the retail price prevailing on the day of the delivery resupply event. As the timing decisions of deliveries is solely within the purview of the retailer, the consumer may be completely exposed to any prevailing market price and large uncertain payment requirements without advance knowledge of the timing or cost of the incoming delivery.
Retailers have therefore offered certain fuel payment options to a consumer. In most cases the payment options involve the retailer entering into a (i) fixed price requirements contract, (ii) with the additional related option of allowing the consumer to make equal installment payments over an extended period, (iii) and with the further optional feature of converting the fixed price into a “cap” arrangement for a fee. This “blunt force” payment spreading method suffers from numerous disadvantages such as that the “fixed price” is usually set before the use season and it may be higher or lower than actual prevailing retail price during the actual period when the heating oil is utilized. If retail prices drop during the period during which the heating oil is consumer the end consumer is required to continue to pay the higher contracted fixed price unless, in certain instances, they have purchased very expensive “cap” insurance that allows their fixed fuel price to drop when fuel market prices drop. However, even these expensive “cap” insurance arrangements may expose the consumer to the volatile retail price of fuel on the day when the fuel is delivered by the supplier. Daily spot prices may differ by 20-30% or more within single delivery days of a single month.
Furthermore, these types of payment programs generally have equal monthly payments based upon estimated future use volumes. The volume estimates may be incorrect based upon unexpected weather volatility or other issues, which expose end consumers to over or underpayments and residual additional unexpected cash payments or very large cash prepayments. Moreover, these programs continue to rely on large working capital-intensive and expensive fuel inventory safety stocks as fuel deliveries continue to be based solely upon supplier estimates or rules of thumb.
In addition to imposing a burden on consumers, the current heating delivery ecosystem may additionally create friction between a consumer and a retailer, as a consumer may pay a high price for a delivery occurring one day while his neighbor may pay a significantly lower price for heating oil delivered only a short time earlier or later. Consumers may then wonder why they were charged more for their delivery. In the same vein, consumers may easily engage in Internet price discovery to determine price differentials or price programs offered by other retailers.
This dissatisfaction with retailers along with the consumer's ownership of both the tank hardware and the heating oil within the tank has resulted in a large degree of switching of consumers between retailers. More specifically, because a consumer may own their tank, and any fuel within the tank (because they paid for the entire amount delivered), there are few barriers or costs associated with switching retailers. Thus, consumers may switch retailers fairly often based on a number of factors, such as discounts offered by retailers or for a variety of other reasons. In fact, some of the biggest retailers of heating oil may experience a gross loss rate of 10% or more of their entire consumer base each year.
Retailers also have various other problems in this ecosystem. As discussed, a retailer may purchase heating oil on a net 10 day basis from the supplier and the consumer is billed upon delivery. The consumer may be on a net 30 day payment basis with the retailer, but typically pays on average between 30 and 45 days. Therefore, the heating oil retailer is currently exposed to 20-35 days of working capital requirements.
Given the deficiencies of the current ecosystem in the purchasing and distribution of consumables, including heating oil and propane, there is always room for innovations and improvements.